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Can you file for bankruptcy on student loans?

As the student debt problem continues to escalate thousands face the possibility of being unable to pay back the exorbitant loan.

University degrees versus student loan debt
Anna MoneymakerGetty

Student debt is a thorny issue for both the American youth affected and the Biden administration trying to deal with it. The decision to cut hundreds of millions of dollars of student debt was met with wide praise in many circles, though the move has been taken out of the president’s hands. The Supreme Court will rule on its legality as soon as March with the potential to overrule the president and plunge millions of students into peril.

With payments set to resume in the summer, along with the return oppressive interest rates, many students will be under the financial cosh come August. The desperation has people turning to all avenues of opportunity to get away from the debt, including the danger of bankruptcy.

But will it work?

In a difference to other debt wiped by bankruptcy proceedings, a filing does not automatically clear your student debt. Both the Chapter 7 and Chapter 13 bankruptcies are complicated processes that require exceptional circumstances with high thresholds of proof to be successful. Even with this, the consequences can be extremely damaging in the long-term if the debt is wiped in this manner. Any other bankruptcy aside from a Chapter 13 can also mean the lost of other collaterals such as a house mortgage.

However, proving to your lender that bankruptcy is necessary includes proving that the debt is causing you “undue hardship”. This entails the debt preventing you from meeting a “minimal” standard of living and being able to show that this is likely to continue for the full duration of the repayment term.

This requirement is planned to be removed by the Biden administration pending the Supreme Court decision.

“The new guidance has the potential to provide a meaningful avenue for relief but its effectiveness will depend on how it is implemented by the Departments of Education and Justice,” said John Rao, staff attorney at the National Consumer Law Center, in a statement.

Be aware that a successful bankruptcy will entail at least a seven or ten year stain on your credit rating, so good luck trying to get a loan for anything else for the best part of a decade.

Aside from bankruptcy there are other alternatives to paying off the debt. If your debt is with the federal government then there is the option to negotiate an income-driven repayment plan, forebearance, or a Public Service Loan Forgiveness plan.